5 Reasons You Shouldn't Trade Forex

Takeaway:Just because anybody can trade forex doesn't mean that they should.

Source:
ForexDictionary

Almost every general article you read on forex market starts by telling you that the forex market is the world’s largest market. This is true. An absolutely staggering amount of money trades hands daily in the form of contracts, real currency and derivatives. But just cause it is big, doesn’t mean the forex market is for you. In fact, there are some very good arguments for you to avoid forex trading all together.

1. You Don’t Have The Money

If you are scrounging in your couch for enough coins to pay the rent, the forex market is not for you. Yes, this is not exactly rocket science, and it applies to every type of investment from bonds to stocks to currency. Forex is a bit of a special case, however. Because of leverage and margin, you can make big investments with very little actual capital. This mean you can do a lot with a little, but leveraged bets on the forex market are best made with risk capital – i.e. not the money you need for groceries.

2. You Can’t Handle Losing

If you trade forex, you are going to have losing trades. There are lots of areas of life where a healthy distaste for losing and a refusal to give up come in handy: boxing, phone-in radio contests, staring contests and so on – but forex is not one of them. In forex you have to be able to quickly recognize a loss and stop it when the amount is still small. A trader can still profit overall if the 90% of trade losses are stemmed early and the 10% of gains are left to run. Nine losses out of ten trades sounds awful, but the overall value of losses and gains are what matter. If you can’t quickly admit and close losing positions, it is nearly impossible to be profitable overall.

3. You Can’t Handle Risk

More often than not, it is the potential for huge returns that interests people in the forex market. Of course, these returns are not without risk. Risk exists in every investment, but once again, forex is in a class of its own. Even if you stick to reasonable leverage levels, your trading will always come with risks. If you can’t stand the idea of losing every dollar in your account, then you probably shouldn’t open it the first place. The opposite is also true – if you absolutely love taking risks, then forex may not be the best investment. There are traders who leverage all their capital in a hail Mary trade that pays off, but being consistently successful with high risk trades is rare. You’re probably better off spending the money on wingsuit flying or putting it on the roulette wheel – that way you at least get pictures or free drinks.

4. You Don’t Know What You’re Doing

Changing your money for a vacation does not qualify you to trade forex. Of course, brokerages will still accept your money whether or not you can tell a currency pair quote from your bowling score. Before you give them your money, you should at least know the basics of the market, the mechanics of trading and know some of the technical and fundamental data that feeds the market. You can learn a lot on the go, but you shouldn’t move up from a demo account until you understand the basics.

5. You Don’t Have Time

The time requirements of forex trading vary according to your style, but they all require more than you think. There is no forex trade that you can place and then forget for 6 months, expecting it to be fine. Trading currency means monitoring the news, the markets and other data sources that will affect your trades. Day traders literally spend most of a day trading. Fundamental traders may not watch a trade daily, but there will still be an economic calendar and news feeds that need to be followed. If you are struggling to find time to mow your lawn, then you probably don’t have time to read the latest releases from the Bank of Japan or carry out proper backtesting on your trading strategy.

Big, but Not for Everyone

Before the hate mail rolls in, lets be clear: the forex market has a lot going for it. Yes, you can trade with very little start-up capital. Yes, you can make money. Yes, it’s a huge, transparent and level market, especially when compared to many other financial markets. But is it for everyone? No. You can work on some of these things, like knowledge and money, but there are many people that will never be a good fit for currency trading. If these five statements rang true for you, you may be one of them. (For more, check out Top 10 Mistakes That First Time Forex Traders Make.)

Andrew Beattie has spent most of his career writing, editing and managing financial content as well as more general web site material in all its many forms. He is especially interested in the future of search and the application of analytics to the business world. He has been a long-time contributor to Investopedia.com and is currently venturing forth on ForexDictionary.Full Bio